This week, CIO Tom Weary, CFA®️, kicks things off by taking a quick look at the economy before sharing the reasoning behind several recent Core Portfolio trades. He also shares earnings reports from several Defensive Portfolio holdings, including The Coca-Cola Company, Johnson & Johnson, and Verizon Communications.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week we made a number of trades in the Core Portfolio and heard from several of our companies in the Defensive Portfolio on the earnings front, but let’s start by taking a quick look at the economy.

Perhaps the headline that grabbed the most attention was this one declaring that last year’s Covid recession was only two months long, the shortest on record.  The announcement Monday from the National Bureau of Economic Research also marks April as the official start of the economic recovery from the initial shock of the coronavirus pandemic last spring, which triggered widespread business and school closures, a steep drop in demand for services and record job losses.  The recession ended the country’s longest recorded economic expansion, which began in June 2009 and lasted 128 months, according to the bureau’s Business Cycle Dating Committee, the accepted arbiter of recession dates in the U.S.  As we can see in this first chart, last year’s recession was extremely brief but far deeper than anything experienced since World War II.  The rebound thus far has been stronger as well.  As this next chart illustrates, after strong first quarter GDP growth of 6.4% Wall Street economists are projecting the second quarter surge to be in the 9 to 10% range before the economy settles back down to around a 2% growth range by the end of next year.  Nothing about 2020 was normal, not the length or depth of the recession nor the rapidity or strength of the economic and stock market rebound.  These are indeed unusual times.

This week we made a number of trades in the Core Portfolio.  The catalyst for these trades was our desire to reduce risk, and there were a couple of names where we felt the risks were growing.  The first name that we let go was Alibaba, often called China’s Amazon.  Alibaba has been underperforming as the company has come under considerable pressure from the Chinese Communist Party ever since founder Jack Ma made critical remarks about the party.  The company was forced to scrap the much-anticipated IPO of their Ant Financial unit at the last minute.  The CCP has been targeting the Chinese Internet giants as they have grown so large as to threaten the party’s control of the economy. For example, the popularity of BABA’s Alipay challenges the CCP’s control of the financial system.  Chinese officials announced a new set of rules just three days after the IPO of Didi, China’s Uber, wrecking the company’s debut in New York.  The unpredictable nature of the Chinese regulatory regime strikes us as a risk we should avoid.  The second name we sold was laser manufacturer Lumentum.  Lumentum has been underperforming since the company became involved in a three-way bidding war for rival Coherent Technologies.  Investors initially cheered when Lumentum backed out rather than overpay for Coherent, but the stock has languished ever since.  Some analysts worry about the company’s dependence upon one large customer, Apple, and whether losing the acquisition may lead to losing that customer.  We would rather not stick around to find out should things not go Lumentum’s way.

We also bought three names for the Core Portfolio.  The first is Catalent, a leading global provider of advanced delivery technologies and development solutions for drugs, consumer and animal health products.  It was formed in 2007 when private equity firm Blackstone acquired the drug delivery business of Cardinal Health and then did an IPO in 2014.  Today, with its operations in more than 80 countries, Catalent is a pioneer in delivery technologies and development solutions for drugs, protein therapy biologics as well as consumer and animal health products.  The second is Teledyne, a defense, aerospace, and industrial technology company, focusing primarily on sensing and imaging products as well as electronic control systems.  Teledyne primarily provides sensing, imaging, and electronic control technologies for a wide variety of advanced engineering applications.  The company’s most important end markets include aerospace & defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil & gas exploration & production, medical imaging, and pharmaceutical research.  They recently acquired FLIR Systems, the maker of the temperature detection device RFA uses at our reception desk.  And the final purchase is FleetCor, which provides fuel cards and workforce payment products and services for businesses around the world to manage and pay expenses.  Fleetcor’s payment programs enable customers to manage their commercial payments, card programs, employee spending and provide card-accepting merchants with a high-volume customer base that can increase their sales and customer loyalty.  These are all mid-sized companies in a variety of industries with strong growth potential.  We feel that we have reduced the risk and upgraded the opportunities in your portfolio.

We heard from several companies in the Defensive Portfolio this week.  On Tuesday, HCA Healthcare, a leading hospital operator, delighted investors by posting earnings of $4.37 which crushed estimates by $1.21 on revenue of $14.4 billion which rose 30% from a year ago and beat by $830 million.  They went one step further and raised their guidance for the year sending the stock up 15%.  We also heard on Tuesday that insurer Travelers earned $3.45 per share for its second quarter, easily beating the consensus estimate of $2.39. Revenue also topped forecasts, with Travelers benefiting from higher premiums, improved investment returns and lower catastrophe losses.  On Wednesday, Coca-Cola reported results that beat on both the top and bottom lines with earnings of 68 cents beating by 12 cents on revenue of $10.1 billion rising 42% from a year ago.  Looking ahead, Coca-Cola sees organic revenue growth of 12% to 14% for fiscal year 2021 and earnings growth of 13% to 15% to $2.20 to $2.24 vs. $2.18 consensus.  Johnson & Johnson, a holding in both Core and Defensive Portfolios, reported stellar results with earnings of $2.48 beating by 19 cents on revenue of $23.3 billion increasing 27% from last year.  J&J has also lifted its 2021 guidance estimating around 10.5-11.5% growth for the base business compared to the 9.7 to 10.9% projection made just three months ago.  And Verizon Communications, also a holding in both portfolios, delighted investors with a beat-and-raise report.  Earnings of $1.37 beat by 7 cents on revenue of $33.8 billion which beat by over $1 billion and rose 11% from a year ago.  The company had strong broadband subscription growth and significantly raised their guidance for 2021.  And after the close on Thursday, Intel reported earnings of $1.28, beating estimates of $1.07 by 20% and raised their revenue guidance for the rest of 2021 as PC platform volume increased 33% from last year.  Investors love to hear that.

So, what does it all mean?  The week began with a plunge in interest rates and a steep stock market  selloff on Monday on news of a Delta-variant driven resurgence in COVID cases causing investors to fear more lockdowns and a setback in the reopening narrative.  But the market quickly bounced back on Tuesday undoing most of the damage.  Things are likely to remain volatile for a while.  A little more volatility might actually be healthy and we would look to take advantage of it.  Your companies continue to report strong result.  We couldn’t even get to all of the reports this week.  We continue to look for ways to upgrade your portfolio and made a number of trades this week in pursuit of that objective.  We’ll stay on top of the latest developments on your behalf.  So, please, sit back, relax and join us again next week for the RFA Weekly Market Update.

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